Michael Kors Inc (KORS) is a luxury lifestyle brand, company around the globe.
Michael Kors (KORS) Company Research
KORS Company Profile
Michael Kors Inc (KORS) is a luxury lifestyle brand, company around the globe. KORS operates its business through three segments namely, the retail, wholesale and licensing. The company has a distribution network in other parts of the globe of company-operated retail stores, leading department stores, specialty stores, and select licensing partners. The company’s retail segment contributed nearly 50 percent of their total revenue in their Fiscal 2015. The company’s retail segment includes 343 North American retail stores, including concession and their U.S. e-commerce site. And, the 183 international retail stores, including arrangements in Europe and Japan.
KORS offers two significant collections, the Michael Kors luxury collection and the MICHAEL Michael Kors accessible luxury collection. The company has also collections that offer accessories, footwear, and apparel. The licensing segment is committed to providing licenses to third parties, which include some production, sales, and/or distribution rights. The company also sells fragrances in its retail stores and by Estee Lauder to wholesale customers. In addition, the company also sells beauty products like nail lacquers, lip products, powers and a collection of body and sun products.
The company’s products are accessories, apparel, footwear, and licensed product. Accessories include handbags and high quality and exotic skins small leather goods. “The Company has engagement with Fossil Partners, LP, (Fossil), which help them create a line of watches and jewelry. The company’s product licensees, in addition to “Fossil”, are the “Aramis” and Designer Fragrances division of The Estee Lauder Companies Inc. (Estee Lauder) for fragrance and beauty, and Luxottica Group (Luxottica) for eyewear, among others. Fossil has been the company’s exclusive watch licensee since April 2004, which is sold in the company’s retail stores.
In addition, Fossil has been the exclusive fashion jewelry licensee since December 2010. Moreover, Luxottica became the company’s exclusive eyewear license in January 2015. It is sold in the company’s retail stores, which serve as the key category. Prior to January 2015, “Marchon” was their exclusive eyewear license. The jewelry product line is bracelets, necklaces, rings, and earrings.
In addition, the company also sells beauty products like nail lacquers, lip products, powders and a collection of body and sun products. Through its retail and wholesale sections, KORS sells its products in three principal geographic markets: North America, Europe, and Asia. Through its licensing section, KORS enters into agreements that license to third parties. They used the company’s brand name and trademarks, other production, and sales and/or distribution rights. Moreover, revenues generated in these agreements are initially earned in North America and Europe.
The Company competes with:
- Coach, Burberry,
- Ralph Lauren,
- Louis Vuitton,
- Marc Jacobs,
- Tori Burch,
2. Date of Incorporation
Michael Kors Holdings Limited (MKHL and its subsidiaries, the Company) was incorporated in the British Virgin Islands (BVI) on December 13, 2002.
3. Place/Head Office
The corporate office of Michael Kors Holding Limited is in 33 Kingsway, London, WC2B 6UF, United Kingdom.
Phone: 44 2076 328 600
In 1981, Michael David Kors, an American designer established Michael Kors Holdings Ltd., known for handbags and accessories and is based in London, United Kingdom.
5. Company Sector/Industry
Company Sector: Consumer Discretionary
Industry: Textiles, Apparel, and Luxury Goods
Sub-industry: Apparel, Footwear, and Accessory Design
6. Date of IPO
The company’s initial public offering (IPO) was on December 15, 2011, with its ordinary shares traded on the New York Stock Exchange (NYSE) under the symbol “KORS”. During IPO the stocks were then traded at $24.20 per shares.
7. Other Significant Company Information
- The company has a total of 9,184 employees.
- And the company has no unresolved staff comments.
- On March 28, 2015, there were 199,656,833 common shares outstanding at a closing sale price of $66.97. Further, the company has 303 common shareholders at the record as of March 28, 2015.
- During fiscal 2013, KORS completed its secondary offerings of 25,000,000 ordinary shares at $47.00 per share. An additional 3,750,000 shares at $47.00 per share were offered because the underwriters exercised their additional shares purchase option.
- In September 2012, KORS completed its secondary offering of 23,000,000 ordinary shares at $53.00 per share. An additional 3,450,000 shares at $53.00 per share were offered in October 2012 because the underwriters exercised their purchase option.
- And on February 2013, completed a secondary offering of 25,000,000 ordinary shares at $61.50 per share.
- The company did not receive proceeds from the sale of the secondary offerings, which they incurred $1.7 million fees and were charged to selling, general and administrative expenses in Fiscal 2013.
8. Material Events Affecting the Numbers
Ms. Cathy Marie Robinson, executive officer of Michael Kors Holdings Limited was reappointed on August 27, 2015, as executive officer of Michael Kors Holdings Limited with a new title of Senior Vice President of corporate strategy and Chief Operations Officer, after her resignation on the same date, August 27, 2015.
Moreover, Ms. Robinson will receive a grant of restricted share units valued at around $1.5 million under the Michael Kors Holding Limited Amended and Restated Omnibus Incentive Plan. Likewise, the employment agreement was effective May 12, 2014, between Ms. Robinson and Michael Kors (USA), Inc. and it remains in effect without modification.
KORS MAIN ACTIVITY
How Does the Company Make Money
Michael Kors Ltd is a global luxury lifestyle brand led by a world-class management team and an award-winning fashion designer. The company’s products are handbags, footwear, accessories, apparel, watches, and others.
As of March 29, 2014, the company managed 405 retail stores, including concessions. In addition, the store sales growth increased by 26 percent from fiscal 2013 due to increases in sales on accessories line and watches during fiscal 2014. Further, the sales in a comparable store had increased by $255.3 million in fiscal 2014 due to an opening of 101 new stores since March 30, 2013.
What do People Think about the Company’s Products or Services?
Here is one of the comments from the customers of Michael Kors Holding Limited.
What is this lawsuit about?
The lawsuit alleges that Michael Kors deceptively and misleadingly labeled and marketed merchandise that it sells at its Michael Kors Outlet Stores, including by using allegedly misleading price tags on its Michael Kors Outlet Products, which Plaintiffs claim resulted in damages to Plaintiffs and the Settlement Class. Michael Kors maintains that its marketing and labeling is not deceptive or misleading and is entirely proper and permitted by law. (source: https://www.michaelkorsoutletsettlement.com/Content/Documents/Long%20Form%20Notice.pdf )
Who is running the Business?
Person-in-charge of the Company
Michael David Kors, Honorary Chairman and Chief Creative Officer of MKHL
Michael Kors is a New York-based fashion designer of American sportswear. He was the first women ready-to-wear designer for the French house Celine, from 1997 to 2003. He was born Karl Anderson, Jr. on August 9, 1959, in Long Island, New York, USA. Kors was married to Lance LePere on August 16, 2011. His parents were Karl Anderson and Joan Hamburg, a former model. His mother remarried Bill Kors when he was five and choose to change his name to Michael David Kors.
Further, Michael Kors graduated from John F. Kennedy High School and studied at Fashion Institute of Technology in New York City. Michael Kors started from a small-time sportswear designer to the head of the company.
On May 20, 2015, Michael Kors (USA), Inc. (the Company) and Michael Kors Holding Limited (MKHL) has entered into an amended and restated employment agreement with each Michael Kors, the Honorary Chairman, and Chief Creative Officer (“the Kors Agreement”), and John D. Idol, Chairman and Chief Executive Officer (“the Idol Agreement”), as required under the terms thereof.
The Kors Agreement is a continuation of terms in prior agreements. The Mr. Kors’ employment agreement will terminate upon his death, permanent disability or for “Cause”, defined in Kors Agreement. The Kors Agreement gives Mr. Kors imaginative and artistic control over the products produced and sold under the MICHAEL KORS trademarks and related marks, including exclusive control of the design of such products, so long as the control is commercially reasonable. Source: SEC filings
All intellectual property generated by or at Mr. Kors’ order in the course of his employment is the exclusive property of the Company. Mr. Kors is obliged to retain the confidentiality of the Company’s proprietary information. In addition, the Company has agreed that they will not enter into any new line of business without Mr. Kors’ consent, if he is reasonable, determines that such line of business is detrimental to the company’s trademarks.
The Company provides health and medical insurance to Mr. Kors at its own cost without contribution from him. The whole life insurance premium policy and the $500,000 term life insurance policy. The Company provides automobile and chauffeur for transport to and from the Company’s offices and for other business purposes. Upon termination of the agreement, he will be allotted to a pro-rate of his bonus, however, if Mr. Kors terminates his employment without the consent of the Company, he will be an independent and exclusive design consultant for the Company with an annual fee of $1.0 million and will not challenge with the Company, for the remainder of his lifetime. Source: SEC filings
In addition, Kors was entitled to a salary of not less than $1.0 million annually, under the new Agreement. Mr. Kors’ total basic compensation in the last fiscal year was $15.13 million USD, out of which, 17 percent were the total annual compensation and 32 percent was restricted stock awards.
He was discovered by Dawn Mello, Fashion Director of Bergdorf. He turned the fashion house with successful accessories and a critically acclaimed ready-to-wear line. The MICHAEL line includes women’s handbags and shoes and ready to wear apparel. The KORS line is footwear and jeans. He was honored by the Couture Council of The Museum at the Fashion Institute of Technology (FIT) with the 2013 Couture Council Award for Artistry of Fashion.
|As a teen,
||He starts designing clothes and selling them.
||He enrolled at Fashion Institute of Technology, after dropping out after nine months, got a job in Bergdorf Goodman boutique and was able to sell his design in a small space given to him.
||Kors launched Michael Kors womenswear line at Bloomingdale’s, Bergdorf Goodman, Lord & Taylor, Neiman Marcus, and Saks Fifth Avenue.
1984 – 1999
||Michael Kors first runway show for the Michael Kors fall collection and was successful in making the Company into a global luxury lifestyle brand.
||Forced him to discontinue the Kors line because of bankruptcy.
||He was able to recover and launched a lower-priced line and was named the first women’s ready-to-wear designer for French house Celine.
|1998 – 2004
||Serve as Creative Director of Celine, the French luxury brand.
||Mr. Kors was the recipient of numerous industry awards, including the CFDA Womenswear Designer of the year 1999 and Menswear Designer of the Year 2003.
2003 – 2009
||Kors left Celine
||Kors launched his menswear line.
||The MICHAEL Michael Kors and KORS Michael Kors lines were launched.
||Awarded as the Accessories Council ACE Award for Designer of the Year 2006.
||Fashion Group International’s Star Honoree at its annual Night of Stars Awards in 2009.
2010 – 2013
||The CFDA acknowledge Mr. Kors with their most prestigious honor, the Lifetime Achievement Award.
||At age 50, Michael Kors became the youngest person ever to receive a lifetime achievement award from the Council of Fashion Designers of America.
||Marked Kors thirtieth year in business. He received the Award of Courage from the American Foundation for AIDS Research (amfAR).
||Kors was selected for The Time 100, the magazine’s annual list of the 100 most influential people in the world.
2014 – Present
||Forbes reported that KORS has a personal fortune of more than $1 billion, making him the latest fashion industry billionaire.
||Michael Kors has full collection boutiques in New York, Beverly Hills, Palm Beach, Manhasset, and Chicago
Further, Mr. Michael Kors is a renowned award-winning designer and is instrumental in defining the brands and designing the company’s collections. His unique role as the founder, Chief Creative Officer and the namesake behind the brand provides the Board of Directors with valuable leadership and insight into the company’s design, marketing, and publicity strategy.
John D. Idol, Chairman of Michael Kors, and Chief Executive Officer (CEO) and a Director
December 2003 to Present
|July 1, 2001 – July 2003
||Chairman and Chief Executive Officer and a director of Kasper ASL, Ltd., whose lines included the Anne Klein brand.
|July 1997 – July 2001
||Chief Executive Officer and a director of Donna Karan International Inc.
|1994 – 1997
||Ralph Lauren’s Group President and Chief Operating Officer of Product Licensing, Home Collection, and Men’s Collection.
It is required in the terms, John D. Idol has entered into an amended and restated employment agreement with Michael Kors Holding Limited, (“the Idol Agreement”). The conditions under the Idol Agreement extend Until March 31, 2018, and will be automatically renewed for an additional one-year term, unless there is an advance written notification of non-renewal by either Mr. Idol or the Company. Mr. Idol will serve as Chairman and Chief Executive Officer of the Company and MKHL, reporting to MKHL Board.
Regarding Retirement and Fringe Rights
Mr. Idols’ employee retirement and fringe rights remain the same under the Idol Agreement. The company will pay the premium up to a maximum of $50,000 per annum, for his $5.0 million whole life insurance policy. He was likewise supplied with an auto and driver for transportation to and from the Company’s offices and for business purposes as provided in the Agreement.
The Idol Agreement will terminate upon a change of control and upon his death or total impairment. Mr. Idol can terminate the agreement without good reason upon 10 days advance written notice, subject to his having certain rights to meet with the MKHL Board, and a majority of the MKHL Board approves his dismissal. Moreover, a pro rata portion of his bonus will be given upon the termination of the agreement. Plus severance equal to double the sum of his current base salary and the annual bonus paid or payable to him during the last fiscal year. And payable in a single lump sum within 30 days after the termination.
Mr. Idol agreed, that all rights to the Company’s intellectual property will remain the sole and sole property of the Company and he will remain bound to preserve the confidentiality of the Company’s proprietary information. Under the new agreement, Mr. Idol is entitled to receive not less than $1.0 million annual salaries. Likewise, John D. Idol totals basic compensation was $15.01 million USD, of which 17 percent were the total annual compensation and 32 percent was restricted stock award.
|July 3, 2007,
||President 2007, Secretary of Global Brands Acquisition Corporation
|Since September 2011
||Chairman of Michael Kors Holding Limited.
||Chief Executive Officer of Michael Kors Corporation
|Since December 2003
||Chief Executive Officer and Director of Michael Kors Holdings Limited.
|July 2001 to July 2003
||Chief Executive Officer of Kasper ASL Ltd.
|July 1997 to July 2001
||Chief Executive Officer and Director of Donna Karan International, Inc.
|1994 to 1997
||Group President and Chief Operating Officer of product licensing, home collections and men’s collection at Ralph Lauren.
|1984 to 1990
||Vice President at Ralph Lauren
||Chairman of Kasper ASL Ltd.
||Mr. Idol began his career at J.P. Stevens.
Key Executive Compensation 2015
The graph above shows the compensation for fiscal 2015. It shows the total amount of compensation for each executive from the highest to the lowest with the percentages against the total key executive compensation. Also, it includes all other benefits received by the executives.
The Historical Key Executive Compensation
- The key executive compensation in Fiscal 2015 was $39 million and it represents 3 percent of the total sales, general and administrative expenses.
- Michael Kors’ total annual compensation was $15.1 million in Fiscal 2015, it represents 39 percent of the total key executive compensation.
- And also, John D. Idol has $15.08 million total annual compensation in Fiscal 2015 and it represents 38.8 percent of the total key executive compensation.
- In addition, Joseph B. Parsons has a total annual compensation of $3.0 million and it represents 8 percent of the total key executive compensation.
- Moreover, Cathy Marie Robinson, Senior Vice President Global Operations has a total annual compensation of $3.6 million, equivalent to 9 percent of the total key executive compensation.
- Finally, Pascale Meyran, Senior Vice President, and Chief Human Resources Officer have total annual compensation of $$2.0 million and it represents 13.6 percent of the total key executive compensation.
- The composition of the total compensation was: salary, restricted stock award, securities options, non-equity compensation, and other compensation.
- Moreover, Mr. Michael Kors and Mr. John Idol have the same amount of salary, restricted stock award, securities options, and non-equity compensation as follows, $2.5, $4.9, $2.6 and $5 million, respectively.
KORS Numbers Analysis
1. Equity and Retained EarningsFacts:
- Shareholders’ equity growth in 5 years was 1,567 percent, from $125 million to $2.1 billion, Fiscal 2011 until the trailing twelve months.
- The year over year growth was increasing or trending up yearly at an average rate of 97 percent.
- And the retained earnings growth in the last five years was 2,783 percent.
- The year over year growth was increasing at an average rate of 107 percent.
- In the fiscal year 2015, a net income of $881 million was added to the shareholders’ equity.
- And the foreign currency adjustments of $91 million were deducted from stockholders’ equity.
- A net gain on derivatives amounting to $31 million was added.
- The exercise of an employee share option, equity compensation expense, and tax benefit on exercise of share options in the amount of $15, $49 and $45 million recorded as additional paid-in capital were added, respectively.
- Also, the purchase of treasury shares in the amount of $495.3 million of 6,800,101 shares was deducted in 2015.
The shareholders’ equity had increased by 24 percent due to an increase in net earnings by 33 percent in the fiscal year 2015 from the fiscal year 2014.
The Equity and Retained Earnings Graph
The graph above shows that the shareholders’ equity and the retained earnings are trending upward from fiscal 2011 to fiscal 2015. In addition, the trailing twelve month shows that retained earnings have a slight increase, no more than 10 percent. Nevertheless, the shareholders’ equity falls down by no more than 10 percent.
The number of shares outstanding is the company’s stock currently held by all its stockholders.
- Fiscal 2015 and the trailing twelve months shares outstanding was 206 and 196.4 million shares.
- And the growth from Fiscal 2011 to Fiscal 2015 was 10 percent.
- The trailing twelve months shows a decreased of 5 percent or $9.55 million.
- The number of shares increases year over year due to an issuance of restricted shares at 18,541, 250,654 and 413,108 shares in 2013, 2014 and 2015, respectively.
- And the exercise of employee share options at 8.7, 2.6 and 1.8 million shares in 2013, 2014 and 2015, respectively.
- In addition, in the trailing twelve months, there was a forfeiture of restricted shares at 8,252 shares which were deducted from the total number of shares.
- Likewise, the exercise of employee share options in the trailing twelve months was 706,343 shares.
The company’s outstanding shares were increasing year over year due to the exercise of employee share options and the issuance of restricted shares.
Details on Share Repurchase Program
- On October 30, 2014, the Board of Directors of KORS authorized a $1.0 billion shares repurchase program.
- While, on May 20, 2015, The Board of Directors authorized an additional $500 million under the existing share repurchase program and extended the program through May 2017.
- In the three months ended June 27, 2015, the company repurchased 6,960,352 shares at a cost of $350.0 million through open market transactions.
- As of June 27, 2015, the remaining available under the repurchase programs was $658.1 million.
Share Repurchase Program
- The company has also a “withhold to cover” repurchase program, which allows the company to withhold common shares from certain executive officers to satisfy maximum tax withholding obligations relating to the vesting of their restricted share awards.
- Moreover, in the three month period ended June 27, 2015, and June 28, 2014, KORS withheld 22,500 shares and 11,022 shares, respectively at a cost of $1.1 million and $1.0 million, respectively, in satisfaction of maximum tax withholding obligations relating to the vesting of restricted share awards.
2. The Valuation Model
Using the valuation model, the following results were summarized in the table below.
- Book value growth rate in 5 years was 47 percent.
- And the book value in 5 years is $74.29 per share.
- Also, the average return on equity is 45.62 percent.
- In addition, the return on book value in 5 year period was $33.89.
- While stock price in 5 years is $335.51.
- The present value of the stock was $145.05.
- Dividend yield was zero percent.
- On the other hand, the risk that was used was 15 percent.
- Current price as of October 1, 2015, was $43.53
- Intrinsic value was $87.03 per share.
- A share price of Michael Kors Holdings Limited was undervalued by 50 percent.
Using the Value Model, the market price of KORS as of October 5, 2015, was undervalued 51 percent because the intrinsic value or the true value of the stock was higher than the market price.
Detailed Financial Analysis
A. BALANCE SHEET
Financial Health Ratios
- The current ratio was averaging 4.66 and the trailing twelve months ratio was 5.35.
- And the quick ratio was averaging 2.96 and the trailing twelve months ratio was 3.19.
- While the financial leverage was averaging 1.59 and the trailing twelve months ratio was 1.22.
- Moreover, the debt to equity ratio was averaging 0.16 and there was zero debt to equity ratio from 2013 to the trailing twelve months.
- And debt to assets ratio was averaging 0.05 and there was zero debt to assets ratio from 2013 to the trailing twelve months.
- The current ratio is a financial health ratio that proves the ability of the company in meeting its financial current obligations using its current assets. KORS is very capable of meeting its current obligations using its current assets because the current assets are 5 times more than its current liabilities. Cash represents 45 percent of the total current assets for the trailing twelve months.
- While the quick ratio is a financial health ratio, which tests the ability of the company in paying its current financial obligation using only its quick assets. Quick assets are current assets minus inventory. KORS has the ability to pay its current obligations using its quick assets because its quick assets are three times greater than its current liabilities.
- Financial leverage is the total assets divided by the total shareholders’ equity. For every $1 in equity that was invested, KORS had $1.59 in total assets.
- While the Debt to Equity ratio is a measure of how much is financed by debt or creditors compared with its owners. KORS has zero debt to equity ratio of 2013 for the trailing twelve months, meaning, the operation of the business is financed solely by the stockholders.
- Moreover, the Debt to Assets ratio is a measure of how much of the total assets are financed by creditors. KORS has a zero debt to equity ratio of 2013 to the trailing twelve months, meaning, the company’s total assets are financed by the stockholders.
The liquidity and solvency ratios tell us that KORS is capable of meeting its current and long-term financial obligations on its due date using its current assets. In addition, the company is capable of paying its current financial obligation using only its quick assets.
- The day’s sales outstanding were averaging 31.97 or 32 days in a period.
- And the day’s inventory was averaging 105 days in a period.
- While the payables period was averaging 36 days in a period.
- On the other hand, the cash conversion cycle (CCC) was averaging 101 days in a period.
- The receivables turnover was averaging 12 times in a period.
- Likewise, the inventory turnover was averaging 4 times in a period.
- Similarly, the fixed asset turnover was averaging 9 times in a period.
- The asset turnover was averaging 2 times in a period.
- Days sales outstanding or average collection period or days sales in receivables, measure the average number of days a business takes to collect its average receivables in a period. It measures the liquidity and efficiency of sales collection activities.
- The day’s inventory is the average number of days that it took to sell the average inventory in a period.
- Payable Period measures the number of days the company takes to pay its suppliers, or it is the average payment period that the company set in making payments to its creditors.
- The cash conversion cycle (CCC) measures the number of days, cash is tied up in the production, in the sales process of its operations and the benefits, it gets in payment terms from creditors.
- Receivables turnover measures how many times a firm collects its average accounts receivable balance during a certain period. In other words, it measures the efficiency of the business to collect credit sales. Higher results are favorable and a lower result is unfavorable.
- While the inventory turnover is the number of times per year that inventory turns over.
- In addition, the fixed assets turnover ratio or the sales to fixed assets ratio. This ratio measures how efficient is the company in utilizing its fixed assets to generate revenue. The ratio is calculated by dividing net sales over average fixed assets.
- Moreover, asset turnover measures the management efficiency in utilizing its average total assets in generating sales or revenue.
- The day’s sales outstanding tells us that, it will take an average of 32 days for the sales or services to be converted into cash.
- And the days’ sales in inventory tell us, that, it will take 105 days for the average inventory to be sold during a period.
- Moreover, the payable period indicates that the average period for the company to pay its suppliers is 36 days from the date of purchase.
- Likewise, the cash conversion cycle (CCC) indicates, that it takes 101 days for the company to turn assets into cash. It also indicates that the company is efficient in managing its working capital and the ability to pay off its current liabilities.
More of Interpretation
- The receivables turnover ratio shows that the company collects its average accounts receivables 12 times in a year.
- Likewise, the fixed asset turnover tells us that the company generates $9.28 of revenue for every $1 investment in net fixed assets over the year.
- And the asset turnover ratio, tells us, that KORS is generating $2.02 of sales for every $1 invested in average total assets. In other words, net sales of KORS is equal to average total assets. This ratio looks at revenue and not profit.
Condensed Balance Sheet
- In the trailing twelve months,
- Total cash was 32 percent of the total assets, a decreased of 4 percent in 2015.
- And the current assets were 71 percent of the total assets, a decreased of 4 percent in 2015.
- On the other hand, current liabilities represent 13 percent of the total liabilities and stockholders’ equity.
- Similarly, total liabilities represent 18 percent of the total liabilities and stockholders’ equity, a one percent increase from 2015.
- Cash was increasing year over year at an average rate of 167 percent in five years. Cash and cash equivalents are highly liquid investments with original maturities of three months or less.
- And the total current assets were increasing year over year at an average rate of 57 percent in the last five years.
- Moreover, net property, plant, and equipment were increasing year over year at an average rate of 40 percent in the last five years. The property is stated at cost less accumulated depreciation and amortization.
- Total assets increased year over year at an average rate of 50 percent in the last five years.
- On the other hand, current liabilities are increasing year over year at an average rate of 25 percent in the last five years.
- Likewise, the total liabilities increase year over year at an average rate of 15 percent in five years.
- Lastly, stockholders’ equity increases year over year at an average rate of 97 percent in the last five years.
Michael Kors Holdings Ltd is a fast developing company. The company has seen 3,738 percent growth in cash, its total assets have seen 540 percent growth and the shareholders’ equity has seen 1,567 percent growth in the last five years.
B. INCOME STATEMENT
- The gross margin was averaging 59 percent and the trailing twelve months ratio was 60 percent.
- Operating margin was averaging 25 percent and the trailing twelve months ratio was 28 percent.
- Net margin was averaging 16 percent and the trailing twelve months ratio was 20 percent.
- Return on assets was averaging 31.07 percent and the trailing twelve months ratio was 36 percent.
- Return on equity was averaging 46 percent and the trailing twelve months ratio was 42 percent.
- Gross profit margin is the percent of profit after deducting the cost of sales from the total sales.
- Operating margin is the percent of profit after deducting the operating expenses from gross profit.
- Net margin is the percent of profit after deducting interest, income tax expenses from the operating income.
- Return on assets ratio is the ratio of net income to average total assets. It measures the efficiency of the management in using the company’s assets in generating net earnings. It indicates the number of cents for every dollar of average total assets.
- Return on equity or return on capital is the ratio of the company’s net income over its stockholders’ equity during a period. It evaluates the profitability of the stockholders’ investment to the company. A higher ratio is better.
The company generates revenue in its divisions or segments around the world. In the 2015 fiscal period, KORS generated $2.13 and $2.1 billion, and $172 million in retail net sales, wholesale net sales, and licensing revenue, respectively. Its highest sales were in North America, followed by Europe.
The gross, operating and net margin increases in 2013 has remained stable going forward at a rate of 60, 29 and 20 percent, respectively. Return on assets tells us that the management is efficient in managing its assets. The return on equity ratio indicates that the company is capable of generating a decent return on the shareholders’ investment in the company.
The Profitability Graph
- The graph shows that the gross margin was between 50 to 60 percent in the last five years.
- Operating margin was ranging from 15 to 30 percent in the last five years.
- Net margins have not seen negative and it was ranging from 7 to 20 percent in the last five years
- The company’s gross margins remain stable in the last five years.
- Operating profit of KORS had increased by 52 percent in 2013 and remain stable at an average 29 percent going forward.
- Net income had increased by 61 percent in 2013 and remain stable at 20 percent going forward.
The graph above shows that the management is efficient and capable of generating decent revenue year over year.
The Earnings Growth Rate
- Gross profit growth in the last five years was 452.5 percent, or from $803 million to $4.4 billion.
- Growth in the trailing twelve months was 2 percent from 2015.
- Operating income growth in the last five years was 798 percent, from $137 million to $1.2 billion.
- The trailing twelve months growth was negative 2 percent from 2015.
- Net earnings growth in the last five years was 1,097 percent, from $72 million to $868 million.
- The trailing twelve months growth was negative 2 percent from 2015.
- Gross profit increases year over year at an average rate of 43 percent in the last five years.
- The net sales from retail stores in Fiscal 2015 represent 49 percent of the total revenue, at $2,134,578,000, a 34 percent increase from Fiscal 2014.
- The net sales from wholesale in Fiscal 2015 represent 47 percent of the total revenue, at $2,065,088,000, a 31 percent increase from Fiscal 2014.
- Revenue from licensing in Fiscal 2015 represents 4 percent of the total revenue, at $171,803,000, a 22 percent increase from Fiscal 2014.
- Total revenue in Fiscal 2015 was $4, 4 billion, compared to the total revenue of $3.3 in Fiscal 2014, having a 32 percent increase.
The company’s revenue was running in three segments, which is the retail, wholesale and licensing. In Fiscal 2015, Accessories contribute the highest sales equivalent to 68 percent of the total sales, Apparel had total sales equivalent to 13 percent, and footwear had total sales equivalent to 11 percent of the total sales. The total revenue from licensed products was equivalent to 8 percent of the total sales.
The Earnings Growth
The graph indicates that the earnings of Michael Kors Holdings Limited were trending up from 2011 for the trailing twelve months. Nevertheless, in the trailing twelve months, the development remains stable from Fiscal 2015. The operating income and the bottom-line show that earnings are getting higher year over year.
C. STATEMENT OF CASH FLOWS
- The cash from operating activities has a growth of 730 percent in the last 5 years, from $110 million to $915 million.
- The capital expenditures were $421 million in the trailing twelve months.
- Free Cash Flows have a growth of 841 percent in the last five years, from $52.47 million to $494 million.
- The cash from operating activities was increasing year over year at an average rate of 67 percent.
- Capital expenditures are investments in property, plant, and equipment and it is increasing year over year.
- The free cash flow is trending up year over year at an average rate of 158 percent. The growth rate in 2013 was 841 percent.
The cash from operating activities and the free cash flows were impressive. The management has the capability of generating sufficient cash from the company’s resources to be utilized for the business operations and for future investments and for paying dividends to its stockholders.
The Enterprise Value (EV) Approach
Enterprise Value (EV) is the present value of the whole company. EV takes into account the balance sheet, so in my own opinion, it is a much more definite measure of a company’s true market value than market capitalization. It assesses the value of the productive resources that are capable of producing products or services, both equity capital (market capitalization) and debt capital. Market capitalization is the value of the whole company’s equity shares.
EV is a company’s presumed takeover price because the buyer would have to purchase all of the stock and pay off existing debt while taking all the remaining cash. This gives the buyer a strong case for making its offer.
The table below shows us the summary of the historical enterprise value.
The trailing twelve months show that,
- Market capitalization was $8.4 billion USD.
- The share price as of October 5, 2015, was $43.53.
- Total debt was zero.
- Cash and cash equivalent were $809 million.
- Calculated enterprise value was $7.6 billion.
- Calculated enterprise value per share was $39.35.
- Total shares outstanding were 193,421,990 million shares.
- Market capitalization growth of KORS was 64 percent in the last five years.
- The company has zero debt from 2013 to the trailing twelve months.
- Cash and cash equivalent represent 11 percent of the enterprise value for the trailing twelve months.
In purchasing the entire business of KORS as of October 5, 2015, the investor would be paying t $7.6 billion at $39.35 per share. The equation in buying would be 100 equity and zero debt.
The Discounted Cash Flow (DCF) Approach on KORS
Discounted cash flow (DCF) is a valuation method used to estimate the value of the entire company today based on future cash flows. DCF calculates the present value of the future cash flows using a discount rate. A present value estimate is then used to evaluate a potential investment. It is described as “discounted” cash flow because of the principle of “time value of money”. In other words, the amount of cash that the company will receive today is worth more than the dollar in the future.
- Vo is the value of the equity of a business today.
- CF1 to CFn represent the expected cash flows (or benefits) to be derived for periods 1 to n. The discounted cash flow model is based on time periods of time of equal length. Because forecasts are often made on an annual basis in practice, we use the terms “periods” and “years” almost interchangeably for purposes of this theoretical discussion.
- r is the discount rate that converts future dollars of CF into present dollars of value.
The Historical Cash Inflows
The EBITDA growth was 759 percent in the last five years, from $162 million to $1.4 billion. In addition, the EBITDA was increasing year over year at an average rate of 75.69 percent.
The Projected Cash Inflows
- The projected cash inflows in Year –
- 1 or in the year 2016 was $1,534,937,800 billion.
- 2 or in the year 2017 was $1,688,431,580 billion.
- 3 or in the year 2018 was $1,857,274,738 billion.
- 4 or in the year 2019 was $2,043,002,212 billion.
- 5 or in the year 2020 was $2,247,302,433 billion.
- The calculated terminal value was $13,829,828,353 billion.
- The estimated present value discounted using the calculated required rate of return in Year –
- 1 or in the year 2016 was $1,312,374,785.
- 2 or in the year 2017 was $1,234,291,275.
- 3 or in the year 2018 was $1,160,853,567.
- 4 or in the year 2019 was $1,091,785,248.
- 5 or in the year 2020 was $1,026,826,346.
- The present value of the terminal value was $6,319,056,975.
- The future enterprise value was $12,145,188,196 at $62.79 per share.
- The current growth rate of cash inflows in Fiscal 2015 was 28 percent, however, this is less than the growth in fiscal 2014 by 31 percent. And, from 2013 to fiscal 2014, the growth diminished by 81 percent.
- The present value of the projected cash inflows was calculated utilizing the required rate of return (RRR) (shown in the table below), with the following formula:
Present Value = Projected Cash Inflows ^n / (1+ discount rate) ^n
- The enterprise value was the sum of the present value at year 1 to year 5 plus the present value of the terminal value. In other words,
Enterprise Value = PV^1 + PV^2 + PV^3 + PV^4 + PV^5 + PV (terminal value)
The present downswing of the luxury wholesale and retail sales globally might continue in the coming more years, due to this, the historical current cash inflow growth rate is not applied.
The Terminal Value
- The calculated Terminal Value using the Gordon Growth model was $13.8 billion.
- The final projected year cash flows of $2,247,302,433.
- The long-term cash flows growth rate of 0.61%.
- And the calculated discount rate or the required rate of return of 16.9588 percent.
Terminal value or continuing value is the value of the firm beyond the projected period. In other words, it is the future discounted value of all future cash inflows beyond a given date.
It needed to come up with a terminal value of cash inflows after projecting the future cash inflows at year 5. If the terminal value or the value of future long term value is not considered, it will be assumed that KORS stopped operating at the end of 5 year projection period.
The Fair Value or Intrinsic Value and the Margin of Safety
- Intrinsic Value or Fair Value was $11.17 billion at $57.73 per share.
- The net debt was -$978,922,000.
- Net Debt = Short term liability + Long term liability – cash and cash equivalent
- Share price as of October 5, 2015, was $43.53.
- The margin of safety was $14.20 per share or 25 percent of the intrinsic value.
- The stock of KORS is undervalued.
The Discount Rate or the Required Rate of Return (RRR)
- The calculated required rate of return or the discount rate was 16.9588 percent.
- The risk-free rate was 7.17 percent.
- The long-term cash flow growth, which is the average long term Gross Domestic Product (GDP) in the United Kingdom was 0.61 percent from 1955 until 2015.
- Risk-Free Rate is the rate of return from an investment with zero risks over a specified period.
- Market Risk Premium is the return expected over and above the risk-free rate.
- Beta is a measure of the stock volatility in the stock price fluctuations in the overall market.
- GDP Growth Rate represents the overall market value of all the goods and services that a country produces over a specific time period – you can think of it as the size of the economy.
The required rate of return (RRR) is the minimum annual return that an investment must provide to support or justify the purchase of an investment. The investor’s decision to invest in a new project depends on their risk tolerance.
This method of valuation tries to work out the value today of the projected cash flows in the future, now let us walk through the calculation of the present value of the projected cash inflow in year 5. I will walk you through by the following formula:
or PV = FV (1+r) n
PV = Present Value
FV = Future Value
r = Rate of Return
n = Number of Periods
Present Value at year 5:
PV = $2,247,302,433 / (1 + 16.9588%) ^5
= $2,247,302,433 / (1.169588) ^5
= $ 1,026,826,346
PV = $1,026,826,346
FV = $2,247,302,433
r = 16.9588%
n = 5
Present Value of Terminal Value
PV = $13,829,828,353 / (1 + 16.9588%) ^5
= $13,829,828,353 / (1.169588) ^5
PV = $6,319,056,975
FV = $13,829,828,353
r = 16.9588%
n = 5
The present value of the future projected cash inflows at year 5 is $1,026,826,346. On the other hand, the present value of the terminal value was $6,319,056,975.
KORS Monthly Stock Trends
What is the stock trends? Stock trends are the general direction in which a market is heading, it is the movements of the highs and lows. The stock trend is a significant factor in technical analysis.
- The chart above illustrates a descending price movement from September 30, 2014, until April 30, 2015.
- Then followed by a horizontal or sideways price movement from May 31, 2015
- Until the trailing twelve months. The sideways pattern has a small price move.
- As a result, a break of a trendline usually indicates a strong trending characteristic either up or downwards.
- Moreover, the chart shows a little price movement in either direction and the chance to get an opportunity for profit is little, for a short term investor.
The trend line shows a descending one-year movement from September 30, 2014, until the trailing twelve months at an average of negative 3.8 percent. Further, the one-year price growth of KORS is negative 40 percent, from $71.39 to $43.07, therefore, the price has a descending trend in a period of one year.
Historical Market Data
- The Price to Earnings in the trailing twelve months was 10.63.
- Earnings per Share for the trailing twelve months was $4.24 and it has a growth of 1185 percent in the last five years. Likewise, EPS is increasing year over year at an average rate of 77 percent in the last five years.
- Price to Book value in the trailing twelve months was $4.10 per share.
- Book Value per share in the trailing twelve months was $10.80 and it has a growth of 588 percent in the last 4 years.
- EV/EBITDA in the trailing twelve months was 6 times.
- The Share Price in the trailing twelve months was $45.12 and it has a growth of 60 percent in the last five years.
- EV/EBITDA in the trailing twelve months was 6 times.
- Market capitalization in the trailing twelve months was $8.4 billion and it has a growth rate of 63 percent.
- The computed price target of KORS using the Price to Earnings was 45.84.
- Price to Earnings (P/E) is the most popular metrics in stock analysis. It calculates the market value of the stocks relative to the earnings of the company. Likewise, it tells us what the market is willing to pay for the earnings of the company. The higher the P/E, the more the market is willing to pay for the earnings of the company.
- In addition, Earnings per Share is a measure of profitability and how the management is handling the business operation. Moreover, it is a number of profits that accrue to each shareholders’ based on a number of shares they owned.
- Moreover, Price to Book ratio is a financial ratio that compares the market price to the book value of the stock.
- Book Value per share is the amount of shareholders’ equity over the number of outstanding shares, it is an indicator of the value of the company’s stock.
- While the Enterprise Value/Earnings before Interest, Tax, Depreciation, and Amortization (EV/EBITDA), determines the value of the company.
- Price Target forecast what the company is worth and compare to market price. It is a function of risk tolerance and the length of time in holding the security.
The financial ratios of KORS were improving year over year and the increase was acceptable. It indicates, that the management was efficient in handling the operation of the business.
The stock trend graph has a descending trend and has a little movement. It is either up or down and a chance for a profit is small, for a short term investor. Hence, KORS stock is a good BUY for a long-term asset.
Researched and Written by Criselda